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Monday, July 23, 2018

What Drives Product Companies to Sue?

Posted by
Michael Risch

There are many studies of patent litigation, including the reasons that firms litigate - I have worked on some myself. Much of it is really helpful information, but all of the studies lack one key component: the patents that get litigated are highly selected. They are selected for a) the firms that litigate (practicing v. non-practicing), b) the patents that are litigated (individual, portfolio, lead), and c) the cases that are litigated to judgment (default, settlement, summary judgment, trial).

In the realm of which firms and patents litigate, most of the studies have looked at the litigation level, comparing characteristics of patents and technology with samples of those patents and technologies that were not litigated. This is helpful information, but it certainly doesn't tell the whole story. So, Dirk Czarnitzki and Kristof Van Criekingen (KU Leuven Managerial Economics) have used suvey data of Belgian firms to be better understand which firms litigate. A draft of their paper New Evidence on Determinants of IP Litigation: A Market-Based Approach is posted on SSRN. Here is the abstract:

We contribute to the economic literature on patent litigation by taking a new perspective. In the past, scholars mostly focused on specific litigation cases at the patent level and related technological characteristics to the event of litigation. However, observing IP disputes suggests that not only technological characteristics may trigger litigation suits, but also the market positions of firms, and that firms dispute not only about single patents but often about portfolios. Consequently, this paper examines the occurrence of IP litigation cases in Belgian firms using the 2013 Community Innovation Survey with supplemental information on IP litigation and patent portfolios. The rich survey information regarding firms’ general innovation strategies enables us to introduce market-related variables such as sales with new products as well as sales based mainly on imitation and incremental innovation. Our results indicate that when controlling for firms’ IP portfolio, the composition of turnover in terms of innovations and imitations has additional explanatory power regarding litigation propensities. Firms with a high turnover from innovations are more likely to become plaintiffs in court. Contrastingly, firms with a high turnover from incremental innovation and imitation are more likely to become defendants in court, and, moreover, are more likely to negotiate settlements outside of court.

The paper itself is relatively straightforward and the results are unsurprising: firms that seem to rely heavily on big innovation sue more, and firms that "imitate" or make incremental innovations tend to get sued more.

I'm not sure what to make of the finding that defendants who imitate are more likely to settle pre-suit (patent portfolio quality being held equal). I suppose that defendants who are making their own big innovations are more likely to challenge validity or argue noninfringement. Then again, the study finds that imitator defendants are more likely to seek patent invalidity, so it may be that either a) they settle when they cannot do win the challenge, or b) innovator defendants rely more on noninfringement.

I suppose that my primary critique is not so much with the empirical method but with the literature review. I think the discussion could have been informed a bit by reference to some of the legal literature in this area. I realize that most economists see law reviews as articles non grata due to lack of peer review, but there's been plenty of decent enough work in this area to merit comment. For example, this draft argues that it is the first to consider out of court settlements, but Lemley, Richardson and Oliver circulated a draft of comprehensive survey results in 2017. Similarly, the article discusses patent portfolios in enforcement, but doesn't mention any of the several legal articles focusing on these dynamics. This is a small point, but an important one. I think legal scholars should look to the economics literature much more often than they do, and I think economic research wouldn't hurt by doing the opposite every once in a while.

In any event, this is an interesting paper that adds new information about how we should think about what drives competitive company litigation.